I feel frugality is one of the most important points for startups and entrepreneur. I'm curious to hear more from you guys regarding this, as what's your take on frugality and any other need/must to have qualities to be a successful entrepreneur?
You can generate revenue to infinity, but you can only cut costs to zero.
This alone means that a bias toward frugality will probably cause you to spend time on the wrong things. It's the equivalent of a freelance developer who charges $100/hr spending 5 hours on Amazon trying to save a couple bucks on an iPhone cable. Cool, you saved $3. But you spent $500 to save it!
Of course, if you haven't found product-market fit, frugality can help give you more time to find it. But once you have a proven business, frugality is a death sentence. While you're trying to save $20/month on your email marketing tool and $50 on cheaper coffee for the office, your competitors will be spending their time and money to acquire your customers.
Generally, you get what you pay for. So if your gut is to always pick the cheap option, you're going to be using bad tools and hiring bad people, and creating bad products.
There's another useful way to look at this mathematically and practically: survival time. If you cut costs to nearly zero, you can survive nearly infinitely.
There are plenty of small companies that serve a small market and last for decades by being careful about spending. That doesn't mean scrimping on coffee, but it means not paying $20k for a stylish sculpture for your office reception or $2M for a beach concert with the hip artist of the day.
The exact same thing applies to personal finance. Often, working towards making a lot more money is the fastest way to get rich, rather than spending a lot of time eliminating small costs (e.g. cheaper coffee). However, for a typical person, eliminating big costs such as expensive luxury cars makes a big difference. If you want your money to last, you need to be frugal relative to the scale of your assets, revenue, and growth.
I feel like this is the popular sentiment these days but I don't fully agree.
I've seen so many companies spend themselves to death and its easy to have it happen much faster than anybody in charge realizes.
I've also seen companies grow expenses as things go well and suddenly there's a massive downturn in the market and they can't recover in time. Meanwhile, more frugal companies have the runway to weather unexpected events.
So I still think there's more value in frugality than is generally accepted.
Developing a tech startup is hard, and 90% of the costs are usually in labor (real or opportunity cost if you are working "for free").
Trying to save a few bucks each month when you are paying engineers $10K+ per month just doesn't make sense. Many engineers are also not good at thinking in "analog" (vs digital) and obsess on things that just impact the wrong thing.
Those comments about people using a couple $100s for monthly SaaS service a few months ago baffled me. The real question is: do those multiply/improve the output of your most scarce resource?
Saving a couple $1000s per year is good all else being equal, but in the end it's creating $100,000s more that matters in business.
If this were true, everyone would do it. This isn't, actually, true at all.
You might say "in theory," but there is a finite amount of money, most of it isn't available, and of what is, most of it won't be interested in any single thing
Besides, more importantly, in practice, you can't just generate revenue. At all. Generating revenue takes the investment of work and money.
All you're doing is failing your null hypothesis using stories.
I can name a startup whose founders talked like you.
They burned more than $50 million in about four years. But they were always talking about how you can just scale revenue, so they needed to spend everything they had to scale sooner.
They had a staff of almost 150 people.
They never had 150 concurrents on-site.
They'd still be searching for product market fit today if they had had even some remote frugality. They'd probably have found something by now.
But you're only describing poorly executed / counterproductive frugality.
Spending $500 of time to save 10 bucks isn't frugality, it's idiocy.
Spending time reducing unit cost as opposed to customer acquisition or building features might be a different discussion, especially if the next marginal customer acquisition starts bumping up against your cost of services/product.
> ...charges $100/hr spending 5 hours on Amazon trying to save a couple bucks on an iPhone cable. Cool, you saved $3. But you spent $500 to save it!
I agree in general with the sentiment that people need to really value their time more than they do. It is a precious ever-depleting resource. That said, we mustn't discount the fact that:
1. One may get better at saving and wouldn't always have to spend 5 hours on Amazon when looking for better deals the next time around.
2. It is not just $3, but might also be that one is learning along way (reading reviews, getting better at identifying quality signals, etc).
3. Developing a habit because every buck one spends could have been saved for (future frugal expenses), because not every waking hour is worth $100 anyway.
4. Valuing all of one's time in terms of billable-hours could be actually used to justify not doing anything else at all; and life/learning/experiences would simply flash-by.
The thing you're missing here is that big upsides are low probability, and reduced downsides are high probability. Swing big, and you might be the guy that knocks it out of the park, but you'll probably be the guy that gets struck out, whereas the guy hitting the ground ball might not get a grand slam, but he's got a good shot of getting on base.
I suspect that the expectation value of cutting costs is going to be higher, but with a much lower variance.
> a freelance developer who charges $100/hr spending 5 hours on Amazon trying to save a couple bucks on an iPhone cable. Cool, you saved $3. But you spent $500 to save it!
Only if you have more work lined up than time to do it. Otherwise it's just another part of your day, that was never going to earn money.
First of all, who said this is the #1 rule of business? Lol. Did you write the only book on business? Are you Steven P Jobs?
Secondly, revenues can't go to infinity. Not only is infinity an uncountable times bigger than a Googol, but market sizes are limited. Organic growth is limited.
It is much easier to cut costs than increase revenue in business. This is why most large companies prefer to cut costs rather than invest in innovation.
The best entrepreneurs are frugal. Warren Buffett is famously frugal and prefers to invest in frugal entrepreneurs. To the point where Buffett once bragged about investing in an entrepreneur who was so frugal he resorted to counting the sheets of toilet paper at his business because he thought he was being cheated (he was).
It depends on the company and how detached the money people are.
In my experience, companies with full closets of office supplies and lots of stuff don’t last. Exception: when investors are plowing unlimited cash.
First rule of procurement is to get 3 quotes and second is to buy intelligently. Engineers shouldn’t be buying cables, and if you just buy the first thing you see, the pennies you miss add up. It also avoids putting you in the position where you’re firing a valuable engineer because he’s buying stuff inappropriately to accumulate loyalty points or helping out a friend selling stuff, etc.
Partial disagree. Pay for good people to make the most out of the tools available. If there is something you need that would improve revenue then get it when it becomes clear but don't just buy top tier X because. Start-ups need as much runway as possible if things dip until the business model is sustainable.
Edit: Even if the business looks sustainable just wait till a disaster like covid comes by and rocks your supply chain and your customers prioritize other expenses.
It is not always revenue vs. cost, there is also a time factor. Being frugal might help staying longer in business, it doesn't matter what the competition are doing, not everything is a zero sum game and sometimes success come because of some event and if you are there to capitalise it you might succeed, like what happening these days with messaging and twitter like apps. So it is all a matter of balance and there is no one way to do those things.
"While you're trying to save $20/month on your email marketing tool and $50 on cheaper coffee for the office, your competitors will be spending their time and money to acquire your customers" - How if they are wasting their money as where you are saving? Wouldn't it give you more resources to go after their customers?
It really depends on how your business is financed and on your access to capital.
As many of the comments (correctly IMO) point out, VC-backed start-ups trade money to compress timelines: for example, hire in two weeks what a non-VC might be able to hire across two years. When you have VC funding and more of it is available, it is in your interest to leverage that money as efficiently as possible to make the case for growth and further investment. Frugality can further hurt you if you are in a VC-fueled industry race because you’ll be outspent and outbuilt by your VC-fueled competition, and it will be harder for you to raise $.
That said, if you’re a regular entrepreneur or business owner, the script is flipped. You are always working within the constraints of profitability and (assuming no major investments are made in you), access to capital is difficult and expensive - debt and credit financing can only grow as a function of revenue and needs to be paid back (whereas VCs give you ‘free’ money, free-as-in-equity). Given that, if you make a dumb financial decision it makes more of an impact on your business. While you still want to go in on big (validated) bets, in general it makes sense to err on the side of frugality and spend less than you bring in.
Equity is actually the most expensive form of capital (measured by an investor's required return on capital). If a startup could raise debt financing, that would no doubt be preferable. However that's quasi-impossible with no revenue. I do agree with the other parts of this answer though.
> That said, if you’re a regular entrepreneur or business owner, the script is flipped.
The problem is that regular entrepreneurs and business owners still must share the market with venture backed startups. You're always one pivot away from some hotshot startup or bigcorp going to war to take away your marketshare by forcing you to address that "the market can remain irrational longer than you can remain solvent" -- in order to compete with VC-backed startups, you need /more/ than just frugality. You need actually better execution -- execution which more effectively serves market demand than your competitors.
>I feel frugality is one of the most important points for startups and entrepreneur.
If you look at some startups, it seems like they're simultaneously frugal and not frugal. E.g. early Google 1999 paid for meals cooked by a chef and onsite massage therapists even though they had no revenue and profit until 2002 -- but on the other hand -- they were very frugal with spending the least amount of money for computer parts[1] and datacenter rack leases.
Likewise, Amazon was famous for being cheap by having employees make desks out of doors but they were bold in spending money on acquisitions that were strategic to their goals or taking expensive risks on Prime's "free shipping" getting abused by customers.
The way to reconcile the inconsistency is that being frugal can't be applied in every area of the company.
So maybe a more realistic tactic for a new YC company is ... it's ok to splurge $5000 on an automatic cappuccino machine in the office for employee well-being, but at the same time, be ultra frugal in AWS costs and analyze the line items like a hawk to make sure the developers are not leaving up idle EC2 instances and wasting money.
+1. I think it is the same on spending and income: you must understand what scales with what. The number of coffee machines scales with the number of employees (and office layout), but the cloud service spend depends on many factors. If nobody ever was asked to keep an eye on that, it can run away quickly and it will be hard to regain control. I've seen people routinely reserve entire vCPUs in Kubernetes for tiny test systems, instead of 150m which would have easily sufficed.
Here’s what I don’t get. Being frugal with AWS costs seems to be another contradiction, like having a Michelin starred chef cook for your employees every day yet penny pinching the cost of the ingredients...
Sure it’s great that you’re saving money somewhere, but you’re still handing the limited runway money hand over fist for unnecessary luxury, no matter how much you save on the little details. If you were actually frugal, you could have much better service without having to worry about each line item as much.
Yup, it's far too easy to hemorrhage money on cloud/hardware without actually achieving anything, and it's similarly easy to undervalue employee satisfaction, motivation, and loyalty.
Have a good sense of what the O(1), O(logN) and O(N) costs of your business are. O(1) costs are stuff like incorporation and legal compliance, O(logN) costs are stuff like the product team and O(N) costs are stuff like server costs and customer service staff.
Didn't this bite them too, via a lack of ECC and associated software development costs? Meanwhile, Amazon used off-the-shelf expensive Sun/HP machines for many tasks.
great insights, instead of going all out on frugality, it can be strategically optimized in various departments depending upon the overall impact. Thanks for sharing your perspective:)
A piece of advice I once got from an old boss and very successful entrepreneur was to focus on increasing revenue, not on decreasing costs. I said don’t both ways increase profits? He responded that your costs could only go down 1x but your revenue can go up almost infinitely.
Not to say that frivolity is good and frugality is always bad. But it shouldn’t be an obsession.
As an employee I would much rather work for a company with soaring revenues than one with quickly decreasing costs :)
I would say frugality is very underrated. It's also not just about saving money. Reducing complexity in your operations (saving time) is arguably more important. Every purchasing decision we make at our 7-person company usually passes through me at some level, and the first question I always ask (in my head) is:
"Would I spend this capital if it were my own money?"
If I answer yes, then it is an automatic approval. Examples of this being petty cash expenditures like one-time licenses for software tools, or very-low-cost on-going services (<$50/m).
If I answer no, then I usually have to engage in a conversation with other stakeholders in the business to build an understanding of how the expense will add value to our business over the long term.
What I like to try and do is push all purchasing decisions into the trivial camp if at all feasible. Outsourcing to 3rd parties is the most obvious way to do this. E.g. instead of hosting your own git repositories on your own servers, look at using Git[Hub/Lab] public/enterprise. This can take a $10k+ capex and diffuse it out into a monthly concern that is lightyears easier to account for and change over time. The challenge is making sure that you aren't outsourcing your key value drivers to 3rd parties. Compliance & industry fit are also a consideration here. Developing some things in house can potentially save you a ridiculous amount of money depending on the specific problem you are trying to solve. And, in-house development will ultimately contribute to a far more important basis of value - your company's intellectual property.
Overrated. When you are running a business you have to consider income, labour and employee retention. Businesses generally spend "extra" money in order to save labour or generate income. That skiing trip to the Alps that you organised for your workers last year? That saved you 10 times as much in recruiting, on-boarding and pay rises. That really expensive enterprise SAAS that you bought? Its boring, but it freed up time for your sales people to generate 3 times more business. etc.
I think it's a bad thing for the lower ranks and a really good thing for leadership.
Frugality can mean being penny wise pound foolish. Not buying tools people need, building things when you could buy them, and settling for less. It's hard to evaluate people on frugality without it being about cheapness. I would argue buying top of the line monitors, software, computers and chairs for your engineers is the frugal choice with the best mid and long term value for your money, but will it look like that to others? Likewise I've seen cultures where the CTO had to approve buying a $50 replacement laptop charger - that's just a waste of time.
That said, leadership should be very deliberate in how money is spent. Taken too far, you can end up with a bunch of high cost low value tools. For example many times I've seen AWS bills where a few weeks of work means millions in savings per year, or tools that cost $10s of thousands per month but are only used by 1-2 people. And that adds up.
I'd always looked at it as there being '2 strands' within the company.
There's the main one, where you "make the money" - this (obviously) has to be profitable at all costs. Then there's the other than intertwines around this to serve the first indirectly - and you can be more flexible here.
e.g. Revenue from google's adwords has to support the cost of their infrastructure and free services - if that's ticking along well, you can have the nice buildings, free chef meals etc. This can be turned up and down depending on the market.
Their product was lavishly over-engineered and beautifully made at vast expense - they were never going to make their costs back however over-priced their fruit-pods were. The more customers they got, the more it was going to cost. Frankly didn't make any difference if the Juicero staff were getting free meals or not (or had their salaries halved) - the lack of frugality at the core of their business doomed them.
Joel Spolsky wrote a classic blog piece on this 20 years ago. If you're in a new market trying to grab leadership, frugality is not important, speed is. If you're in a competitive market keeping costs low is very important.
https://www.joelonsoftware.com/2000/05/12/strategy-letter-i-...
I think frugality is absurd, and minimalism is what you wanna be aiming for where you are highly sensitive to the ROI of your each and every spend.
Frugality is being cheap just for the sake of not spending money. Most startups on the other hand have more incentives in maximizing their spend towards increasing and retaining their current and future cash-flow.
If we combine that with network effects, your cash-flow is technically growing relative to the exponential growth of your network / userbase / community.
This may not be exactly what you mean, but I worked for a successful startup that chose to cut certain costs in favor of others. I appreciated this practice--no excessive waste, only spending on what felt like mattered. My salary was above average for the market, with best in class health care. Those matter way more to me than pool tables and beer kegs.
For example: 1) no free lunches or snacks (though there was always lots of free food around from leftover meetings with customers); 2) "swag" for employees once per year, one item, thoughtfully chosen and good quality. This resulted in everyone getting really EXCITED about it and rallying around it; 3) a Bevi machine (effectively a bubble water fountain) instead of coolers of free drinks.
I think spending smartly is more important than simply being frugal.
For instance, when you are buying equipment, you don't buy the cheap stuff just because it's cheap. You buy the best stuff the first time, because you will usually save money over the long run. If you bought the cheap stuff first, and it didn't work or didn't last, but then bought the best stuff later, now you paid extra and wound up at the same place.
This doesn't apply to everything, though. The boss I had who operated this way strictly decided he didn't want the $80 video card in his computer, he wanted a $200 one (which back then was like buying a GeForce 3070 just to run spreadsheet applications on a single monitor).
It depends based on the type of business you're in.
I help run a physical goods business.
Margins on these types of businesses (for the most part) 10-15%.
If we find a way to reduce expenses by 0.5% (of revenue) by spending 10 hours, it's worth it. On the face of it, it seem trivial and not worth it. But at the end of the year, these cost saving tactics add up and contribute to profitability. Sometimes it's the difference between giving our team a bonus or not.
Whereas in a SaaS business, the margins are far higher and your time is better spent (probably) on increasing revenue, rather than shaving expenses.
As someone already said, there's only so many expenses you can cut.
Being frugal is only half of the equation. It depends what you do with the money you save. Are they being frugal to make targeted investments in the things that have a good pay off or are they frugal in ways that prevents them from even taking advantage of opportunities.
By way of analogy, consider a household that is really frugal and doesn't spend most of the money the could spend. If that is part of a goal to put their kids through college with no debt, save up to buy a business, pay off debt, etc. then there is a plan. If they are just stuffing money away into a mattress it isn't quite the same.
If anything I'd say it's overrated. For all the hype, how many Lean Startup success stories do we have vs. VC-backed, burn-money-for-time plays? How many IPOs in the past 10 years have come from turning old doors into desks instead of going to Costco?
There's obviously no one way to success in entrepreneurship. If times are lean and you have no easy access to money, sure, being frugal is phenomenal. If you're a 40 year old PM at Facebook thinking of doing your own thing? Pay to delegate every single thing you can. All in all, play to your strengths.
I personally think frugality is always important, regardless of whether you're well funded or not. It helps set the tone for your company as one that wishes to avoid frivolousness, which helps you and your people make good decisions, in addition to preventing you burning through cash too quickly.
Balance is more important than frugality. Know where to spend and where to cut costs. I've been in more than a few small companies that took penny-pinching to extremes.
You can't architect a complex application stack with a couple of interns and a newbie developer with no oversight. We'd pay below-market salaries for senior engineers and architects, because "a programmer is a programmer", and we'd lose them.
We'd refuse to pay $150 to have our DevOps guy get his AWS certification because "he may get a better job and leave"... which he eventually did anyway.
Yet the same company was burning $4,000 a month on AWS services that were severely under-utilized, because the DevOps guy left and no one knew how to optimize our AWS usage.
None of these products eventually succeeded. One of the two companies above shut down years ago after a multi-year schedule slip that resulted in the private equity funding drying up. The last time I looked, the other company has been struggling with cash flow problems for the better part of a decade, barely making ends meet, slashing salaries and jobs several times, pushing the better devs to greener pastures.
A few other companies I worked for had sound leadership and a clear vision. Not being a unicorn or a FAANG means we paid above market average salaries and empowered our engineers to make decisions (and mistakes!) to retain great talent and build cool stuff, which we shipped and sold. We invested in growing our people while keeping other overheads (such as unused conference rooms, wasteful pantry supplies, AWS expenses, etc.) low.
At the moment we are living in a time with very strange monetary policy, in any situation where we have zero (or more absurdly negative) interest rates any venture that has potential to be profitable while growing will find that the easy funding tends to be valued more than frugality from the perspective of those providing funding. In a negative interest rate world burning money for time plays get a whole lot more attractive.
I've seen so many startups, first thing they do once they get that VC money, they move to a flashy new office, add top of the line coffee machines, craft beer on tap, fridges and catering, hire masseuse, team building coach, lease some supercars or executive cars, get some graphics designers, spend days on photo shoots praising their future product, take teams to fancy restaurants, find and fly business class to every possible conference in the tropics, meanwhile developer salaries stay the same or get cut, as company is in a "growth stage". Then people who did the most work and feel most exploited leave, they get replaced by young and energetic Udemy / boot camp taught developers and once the money gets close to run out, they get on a crunch to convince investors to pour even more money, whilst the board is thinking where to build their next house.
[+] [-] pembrook|5 years ago|reply
You can generate revenue to infinity, but you can only cut costs to zero.
This alone means that a bias toward frugality will probably cause you to spend time on the wrong things. It's the equivalent of a freelance developer who charges $100/hr spending 5 hours on Amazon trying to save a couple bucks on an iPhone cable. Cool, you saved $3. But you spent $500 to save it!
Of course, if you haven't found product-market fit, frugality can help give you more time to find it. But once you have a proven business, frugality is a death sentence. While you're trying to save $20/month on your email marketing tool and $50 on cheaper coffee for the office, your competitors will be spending their time and money to acquire your customers.
Generally, you get what you pay for. So if your gut is to always pick the cheap option, you're going to be using bad tools and hiring bad people, and creating bad products.
[+] [-] pushrax|5 years ago|reply
There are plenty of small companies that serve a small market and last for decades by being careful about spending. That doesn't mean scrimping on coffee, but it means not paying $20k for a stylish sculpture for your office reception or $2M for a beach concert with the hip artist of the day.
The exact same thing applies to personal finance. Often, working towards making a lot more money is the fastest way to get rich, rather than spending a lot of time eliminating small costs (e.g. cheaper coffee). However, for a typical person, eliminating big costs such as expensive luxury cars makes a big difference. If you want your money to last, you need to be frugal relative to the scale of your assets, revenue, and growth.
[+] [-] lionheart|5 years ago|reply
I've seen so many companies spend themselves to death and its easy to have it happen much faster than anybody in charge realizes.
I've also seen companies grow expenses as things go well and suddenly there's a massive downturn in the market and they can't recover in time. Meanwhile, more frugal companies have the runway to weather unexpected events.
So I still think there's more value in frugality than is generally accepted.
[+] [-] cynusx|5 years ago|reply
Generating revenue is the hard part in business, spending is really, REALLY easy.
[+] [-] throwaway78123|5 years ago|reply
Developing a tech startup is hard, and 90% of the costs are usually in labor (real or opportunity cost if you are working "for free").
Trying to save a few bucks each month when you are paying engineers $10K+ per month just doesn't make sense. Many engineers are also not good at thinking in "analog" (vs digital) and obsess on things that just impact the wrong thing.
Those comments about people using a couple $100s for monthly SaaS service a few months ago baffled me. The real question is: do those multiply/improve the output of your most scarce resource?
Saving a couple $1000s per year is good all else being equal, but in the end it's creating $100,000s more that matters in business.
Focus on the right order of magnitude.
[+] [-] JohnHaugeland|5 years ago|reply
If this were true, everyone would do it. This isn't, actually, true at all.
You might say "in theory," but there is a finite amount of money, most of it isn't available, and of what is, most of it won't be interested in any single thing
Besides, more importantly, in practice, you can't just generate revenue. At all. Generating revenue takes the investment of work and money.
All you're doing is failing your null hypothesis using stories.
I can name a startup whose founders talked like you.
They burned more than $50 million in about four years. But they were always talking about how you can just scale revenue, so they needed to spend everything they had to scale sooner.
They had a staff of almost 150 people.
They never had 150 concurrents on-site.
They'd still be searching for product market fit today if they had had even some remote frugality. They'd probably have found something by now.
[+] [-] free_rms|5 years ago|reply
Spending $500 of time to save 10 bucks isn't frugality, it's idiocy.
Spending time reducing unit cost as opposed to customer acquisition or building features might be a different discussion, especially if the next marginal customer acquisition starts bumping up against your cost of services/product.
[+] [-] ignoramous|5 years ago|reply
I agree in general with the sentiment that people need to really value their time more than they do. It is a precious ever-depleting resource. That said, we mustn't discount the fact that:
1. One may get better at saving and wouldn't always have to spend 5 hours on Amazon when looking for better deals the next time around.
2. It is not just $3, but might also be that one is learning along way (reading reviews, getting better at identifying quality signals, etc).
3. Developing a habit because every buck one spends could have been saved for (future frugal expenses), because not every waking hour is worth $100 anyway.
4. Valuing all of one's time in terms of billable-hours could be actually used to justify not doing anything else at all; and life/learning/experiences would simply flash-by.
[+] [-] CuriouslyC|5 years ago|reply
I suspect that the expectation value of cutting costs is going to be higher, but with a much lower variance.
[+] [-] OJFord|5 years ago|reply
Only if you have more work lined up than time to do it. Otherwise it's just another part of your day, that was never going to earn money.
[+] [-] glaive123|5 years ago|reply
Secondly, revenues can't go to infinity. Not only is infinity an uncountable times bigger than a Googol, but market sizes are limited. Organic growth is limited.
It is much easier to cut costs than increase revenue in business. This is why most large companies prefer to cut costs rather than invest in innovation.
The best entrepreneurs are frugal. Warren Buffett is famously frugal and prefers to invest in frugal entrepreneurs. To the point where Buffett once bragged about investing in an entrepreneur who was so frugal he resorted to counting the sheets of toilet paper at his business because he thought he was being cheated (he was).
[+] [-] Spooky23|5 years ago|reply
In my experience, companies with full closets of office supplies and lots of stuff don’t last. Exception: when investors are plowing unlimited cash.
First rule of procurement is to get 3 quotes and second is to buy intelligently. Engineers shouldn’t be buying cables, and if you just buy the first thing you see, the pennies you miss add up. It also avoids putting you in the position where you’re firing a valuable engineer because he’s buying stuff inappropriately to accumulate loyalty points or helping out a friend selling stuff, etc.
[+] [-] spurdoman77|5 years ago|reply
Being frugal and priorizing business spending and time are not contradictory. Frugality is about spending less while getting the same value.
[+] [-] jbay808|5 years ago|reply
You can also increase costs to infinity. Frugality doesn't have to be about cutting down on costs that already exist.
[+] [-] Riverheart|5 years ago|reply
Edit: Even if the business looks sustainable just wait till a disaster like covid comes by and rocks your supply chain and your customers prioritize other expenses.
[+] [-] TheOtherHobbes|5 years ago|reply
[+] [-] quantified|5 years ago|reply
[+] [-] malavwarke|5 years ago|reply
[+] [-] golemiprague|5 years ago|reply
[+] [-] blueflame7|5 years ago|reply
[+] [-] goopthink|5 years ago|reply
As many of the comments (correctly IMO) point out, VC-backed start-ups trade money to compress timelines: for example, hire in two weeks what a non-VC might be able to hire across two years. When you have VC funding and more of it is available, it is in your interest to leverage that money as efficiently as possible to make the case for growth and further investment. Frugality can further hurt you if you are in a VC-fueled industry race because you’ll be outspent and outbuilt by your VC-fueled competition, and it will be harder for you to raise $.
That said, if you’re a regular entrepreneur or business owner, the script is flipped. You are always working within the constraints of profitability and (assuming no major investments are made in you), access to capital is difficult and expensive - debt and credit financing can only grow as a function of revenue and needs to be paid back (whereas VCs give you ‘free’ money, free-as-in-equity). Given that, if you make a dumb financial decision it makes more of an impact on your business. While you still want to go in on big (validated) bets, in general it makes sense to err on the side of frugality and spend less than you bring in.
[+] [-] stork19|5 years ago|reply
[+] [-] yowlingcat|5 years ago|reply
The problem is that regular entrepreneurs and business owners still must share the market with venture backed startups. You're always one pivot away from some hotshot startup or bigcorp going to war to take away your marketshare by forcing you to address that "the market can remain irrational longer than you can remain solvent" -- in order to compete with VC-backed startups, you need /more/ than just frugality. You need actually better execution -- execution which more effectively serves market demand than your competitors.
[+] [-] malavwarke|5 years ago|reply
[+] [-] jasode|5 years ago|reply
If you look at some startups, it seems like they're simultaneously frugal and not frugal. E.g. early Google 1999 paid for meals cooked by a chef and onsite massage therapists even though they had no revenue and profit until 2002 -- but on the other hand -- they were very frugal with spending the least amount of money for computer parts[1] and datacenter rack leases.
Likewise, Amazon was famous for being cheap by having employees make desks out of doors but they were bold in spending money on acquisitions that were strategic to their goals or taking expensive risks on Prime's "free shipping" getting abused by customers.
The way to reconcile the inconsistency is that being frugal can't be applied in every area of the company.
So maybe a more realistic tactic for a new YC company is ... it's ok to splurge $5000 on an automatic cappuccino machine in the office for employee well-being, but at the same time, be ultra frugal in AWS costs and analyze the line items like a hawk to make sure the developers are not leaving up idle EC2 instances and wasting money.
[1] https://commons.wikimedia.org/wiki/File:Google%E2%80%99s_Fir...
[+] [-] cmenge|5 years ago|reply
[+] [-] joefourier|5 years ago|reply
Sure it’s great that you’re saving money somewhere, but you’re still handing the limited runway money hand over fist for unnecessary luxury, no matter how much you save on the little details. If you were actually frugal, you could have much better service without having to worry about each line item as much.
[+] [-] Blahah|5 years ago|reply
[+] [-] shalmanese|5 years ago|reply
[+] [-] akhilcacharya|5 years ago|reply
Didn't this bite them too, via a lack of ECC and associated software development costs? Meanwhile, Amazon used off-the-shelf expensive Sun/HP machines for many tasks.
[+] [-] malavwarke|5 years ago|reply
[+] [-] adamnemecek|5 years ago|reply
This is such a stupid idea. At some point it would make sense to start making your own optimally designed desks.
[+] [-] chadash|5 years ago|reply
Not to say that frivolity is good and frugality is always bad. But it shouldn’t be an obsession.
As an employee I would much rather work for a company with soaring revenues than one with quickly decreasing costs :)
[+] [-] bob1029|5 years ago|reply
"Would I spend this capital if it were my own money?"
If I answer yes, then it is an automatic approval. Examples of this being petty cash expenditures like one-time licenses for software tools, or very-low-cost on-going services (<$50/m).
If I answer no, then I usually have to engage in a conversation with other stakeholders in the business to build an understanding of how the expense will add value to our business over the long term.
What I like to try and do is push all purchasing decisions into the trivial camp if at all feasible. Outsourcing to 3rd parties is the most obvious way to do this. E.g. instead of hosting your own git repositories on your own servers, look at using Git[Hub/Lab] public/enterprise. This can take a $10k+ capex and diffuse it out into a monthly concern that is lightyears easier to account for and change over time. The challenge is making sure that you aren't outsourcing your key value drivers to 3rd parties. Compliance & industry fit are also a consideration here. Developing some things in house can potentially save you a ridiculous amount of money depending on the specific problem you are trying to solve. And, in-house development will ultimately contribute to a far more important basis of value - your company's intellectual property.
[+] [-] throw14082020|5 years ago|reply
[+] [-] fergie|5 years ago|reply
[+] [-] mindvirus|5 years ago|reply
Frugality can mean being penny wise pound foolish. Not buying tools people need, building things when you could buy them, and settling for less. It's hard to evaluate people on frugality without it being about cheapness. I would argue buying top of the line monitors, software, computers and chairs for your engineers is the frugal choice with the best mid and long term value for your money, but will it look like that to others? Likewise I've seen cultures where the CTO had to approve buying a $50 replacement laptop charger - that's just a waste of time.
That said, leadership should be very deliberate in how money is spent. Taken too far, you can end up with a bunch of high cost low value tools. For example many times I've seen AWS bills where a few weeks of work means millions in savings per year, or tools that cost $10s of thousands per month but are only used by 1-2 people. And that adds up.
[+] [-] goldcd|5 years ago|reply
Counter-example that springs to mind is AvE's Juicero teardown - https://www.youtube.com/watch?v=_Cp-BGQfpHQ&ab_channel=AvE
Their product was lavishly over-engineered and beautifully made at vast expense - they were never going to make their costs back however over-priced their fruit-pods were. The more customers they got, the more it was going to cost. Frankly didn't make any difference if the Juicero staff were getting free meals or not (or had their salaries halved) - the lack of frugality at the core of their business doomed them.
[+] [-] u678u|5 years ago|reply
[+] [-] joshxyz|5 years ago|reply
Frugality is being cheap just for the sake of not spending money. Most startups on the other hand have more incentives in maximizing their spend towards increasing and retaining their current and future cash-flow.
If we combine that with network effects, your cash-flow is technically growing relative to the exponential growth of your network / userbase / community.
Related post: https://wallstreetplayboys.com/become-a-minimalist-dont-be-f...
[+] [-] ambivalents|5 years ago|reply
For example: 1) no free lunches or snacks (though there was always lots of free food around from leftover meetings with customers); 2) "swag" for employees once per year, one item, thoughtfully chosen and good quality. This resulted in everyone getting really EXCITED about it and rallying around it; 3) a Bevi machine (effectively a bubble water fountain) instead of coolers of free drinks.
[+] [-] larrik|5 years ago|reply
For instance, when you are buying equipment, you don't buy the cheap stuff just because it's cheap. You buy the best stuff the first time, because you will usually save money over the long run. If you bought the cheap stuff first, and it didn't work or didn't last, but then bought the best stuff later, now you paid extra and wound up at the same place.
This doesn't apply to everything, though. The boss I had who operated this way strictly decided he didn't want the $80 video card in his computer, he wanted a $200 one (which back then was like buying a GeForce 3070 just to run spreadsheet applications on a single monitor).
[+] [-] dhruvkar|5 years ago|reply
I help run a physical goods business. Margins on these types of businesses (for the most part) 10-15%.
If we find a way to reduce expenses by 0.5% (of revenue) by spending 10 hours, it's worth it. On the face of it, it seem trivial and not worth it. But at the end of the year, these cost saving tactics add up and contribute to profitability. Sometimes it's the difference between giving our team a bonus or not.
Whereas in a SaaS business, the margins are far higher and your time is better spent (probably) on increasing revenue, rather than shaving expenses.
As someone already said, there's only so many expenses you can cut.
[+] [-] troupe|5 years ago|reply
By way of analogy, consider a household that is really frugal and doesn't spend most of the money the could spend. If that is part of a goal to put their kids through college with no debt, save up to buy a business, pay off debt, etc. then there is a plan. If they are just stuffing money away into a mattress it isn't quite the same.
[+] [-] zemvpferreira|5 years ago|reply
There's obviously no one way to success in entrepreneurship. If times are lean and you have no easy access to money, sure, being frugal is phenomenal. If you're a 40 year old PM at Facebook thinking of doing your own thing? Pay to delegate every single thing you can. All in all, play to your strengths.
[+] [-] osrec|5 years ago|reply
[+] [-] korginator|5 years ago|reply
You can't architect a complex application stack with a couple of interns and a newbie developer with no oversight. We'd pay below-market salaries for senior engineers and architects, because "a programmer is a programmer", and we'd lose them.
We'd refuse to pay $150 to have our DevOps guy get his AWS certification because "he may get a better job and leave"... which he eventually did anyway.
Yet the same company was burning $4,000 a month on AWS services that were severely under-utilized, because the DevOps guy left and no one knew how to optimize our AWS usage.
None of these products eventually succeeded. One of the two companies above shut down years ago after a multi-year schedule slip that resulted in the private equity funding drying up. The last time I looked, the other company has been struggling with cash flow problems for the better part of a decade, barely making ends meet, slashing salaries and jobs several times, pushing the better devs to greener pastures.
A few other companies I worked for had sound leadership and a clear vision. Not being a unicorn or a FAANG means we paid above market average salaries and empowered our engineers to make decisions (and mistakes!) to retain great talent and build cool stuff, which we shipped and sold. We invested in growing our people while keeping other overheads (such as unused conference rooms, wasteful pantry supplies, AWS expenses, etc.) low.
[+] [-] xyzelement|5 years ago|reply
What separates successful people and companies from the rest is "investing in the right stuff and ignoring the rest."
Your whole success depends on your ability to identify that which gets the bulk of your resources and that which gets nothing.
[+] [-] JanisL|5 years ago|reply
[+] [-] varispeed|5 years ago|reply